Q3 2023 BellRing Brands Inc Earnings Call
Good day, and thank you for standing by and welcome to the Bel Ray brands third quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the <unk>.
You will need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
It is now my pleasure to introduce Jennifer Meyer of Investor Relations Valerie.
Good morning, and thank you for joining us today for Bell ring brands third quarter fiscal 2023 earnings call with me today are Darcy Davenport, our president and CEO and Paul wrote our CFO .
Darcy and Paul will begin with prepared remarks, and afterwards, we'll have a brief question and answer session.
The press release and supplemental slide presentation that supports these remarks are posted on our website.
<unk> Investor Relations.
Our SEC filings sections at Bell Rang Dot Com. In addition, the release and slides are available on the SEC's website.
Before we continue I would like to remind you that this call will contain forward looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements.
These forward looking statements are current as of the date of this call and management undertakes no obligation to update these statements as.
A reminder, this call is being recorded and an audio replay will be available on our website and finally this call will discuss certain non-GAAP measure.
Reconciliation of these non-GAAP measures to the nearest GAAP measure see our press release issued yesterday and posted on our website with that I will turn the call over to Darcy.
Thanks, Jennifer and thank you all for joining US last evening, we reported our third quarter results and posted a supplemental presentation to our website.
I'm pleased to share our Q3 results were above our expectations net sales grew 20% over prior year and adjusted EBITDA was up 8%.
The momentum in the business is palpable as we'd restart demand drivers on shakes.
This quarter, we brought new capacity online, which allowed us to relaunch our temporarily discontinued shake flavors and expand our successful limited time offer program.
Consumer and retailer excitement around these new flavors is incredible.
But premier protein and diamond ties powder businesses are also proving to be strong growth engines with both brands expanding distribution and responding well to media.
You saw last night, we raised our outlook for the year. We now expect net sales to grow between 19 and 22% over fiscal 'twenty, two with adjusted EBITDA to grow between 22 and 25%.
Our better than expected Q3 performance drove our decision to raise our full year guide.
We are proud of the progress that we made this year well certainly not finished with our planning process. Our initial expectations for next year are to deliver at the high side of our long term algorithm in both net sales growth and adjusted EBITDA margin.
As a reminder, our algorithm and net sales growth.
Net sales growth of between 10, and 12% with EBITDA margins of between 18% to 20%.
I'll provide more details on our fiscal 'twenty four outlook in November .
Turning to Q3, let's start with shake production, our production growth over fiscal 'twenty. Two continues to track in line with our expectations with year to date production up low double digits.
Happy to share that we brought a new command center.
Online during Q3, they represent one of our two greenfield facilities in our shake capacity expansion plan and they had a smooth startup.
They continue to scale up and will be a small contributor to our Q4, but a much larger contributor to fiscal 'twenty four and beyond.
Our second Greenfield facility and Michael Foods is expected to start up in Q1.
While a slight delay we remain on track to add north of 20% incremental capacity next year.
This allows us to rebuild our internal safety stock and deliver robust growth in 'twenty four and beyond.
Now to the category and brand updates the convenient nutrition category grew 14% in Q3 as tailwind around health and wellness and fitness continued to drive growth.
Consumer interest in functional beverages, and sports nutrition products continues to be high ready.
Ready to drink growth led the category up 21% and ready to mix grew 16% increase supply is lifting ready to drink growth, while increased promotion marketing and distribution are boosting both segments.
Moving forward, we expect to see continued strong volume growth, but pricing to be a smaller contributor.
Premier protein shake consumption accelerated this quarter up 27% growth with terrific across all channels, driven by improved supply and flavor expansion.
The highest growth was in mass and e-commerce as both benefited from a full range of flavors and higher in stock levels.
Our summer limited time offering root beer floats was available outside of E. Commerce for the first time and demonstrated an impressive 90% incremental to the brand.
In July shake consumption continued to grow up 21% demonstrating continued strength.
Our brand metrics this quarter reflect our building momentum.
Premier protein RTD market share reached 20% our highest ever quarterly share.
I'm also happy to report that shake Tdp's have returned to growth surpassing our previous high in late fiscal 2021.
Recall last quarter Premier protein became the number one brand in the RTD segment and the number one brand in the broader convenient nutrition category.
The brand stayed in the top spot throughout the quarter. All of this is especially encouraging because we still haven't restarted meaningful marketing and promotions.
Premier protein made great progress in household penetration this quarter with the brand, adding nearly one percentage point.
Versus Q2, reaching 15% of household.
Our household penetration continues to be the highest in the category and we expect our Q4 marketing and promotional activities to further grow household penetration.
Our repeat them buy rates are holding steady demonstrating our consumer loyalty.
The Premier protein brand is proving it can travel to other forums and categories Premier powders consumption was up 85% behind new distribution and strong velocities in the same way that premier Mainstreamed. The RTD category. We believe the brand can do the same within the powder categories.
In addition, we are seeing early success with our licensing strategy in both cereal and frozen pancakes, although not a significant revenue driver. We are encouraged that the brand can be successful and other high traffic aisles.
Turning to Diamond ties the brand had another strong quarter with consumption dollars up 39%, we saw double digit growth in nearly all channels driven by distribution gains promotion and marketing the brand strength continued into July .
Diamond type of success with mainstream consumers continues this fiscal year marks the first time the brand has meaningfully invested in broader media and our strategy is working base velocities on our flagship line ISO 100 are up 30% versus the pre media period.
Market share Tdp's and household penetration reached new highs this quarter with a ton of upside still in our future.
Encouragingly as dematteis adds new households, and distribution points repeat in buy rates are holding steady.
In closing I'm delighted with our year to date progress. We're on track to deliver results ahead of our guide last November .
We are accelerating and gaining momentum and are almost every part of our business.
Our first shake Greenfield facility is now up and running bringing us closer to a realized to realizing a step change in our shape production run rates.
Premier protein maintains the number one share position in our in our grilling on trend convenient nutrition category.
We have begun to drive demand by Relaunching, our full assortment of flavors.
The premier protein and diamond ties are delighting mainstream consumers and reaching all time highs in market share.
This momentum has come without major marketing and promotion.
Looking forward, we can't we can't wait to bring the premier protein and Diamond type brands to more consumers and help grow the category with our retail partners.
We look forward to providing more specifics around in fiscal 'twenty for next quarter. Thank you for your continued support and I'll now turn the call over to Paul.
Thanks, Stuart and good morning, everyone.
As Darren highlighted our third quarter performance was modestly above our expectations.
Net sales for the quarter were $446 million and adjusted EBITDA was $87 million.
Net sales grew 20% over prior year and adjusted EBITDA increased 8% with adjusted EBITDA margin of 19, 5%.
Starting with brand performance Premier protein net sales grew 20% with growth split evenly across Boeing that pricing.
Volume grew 10% benefiting from increased production compared to year ago, the relaunch of temporarily discontinued flavors and strong growth from our premier pumps.
As a reminder, we have fully lapped the April 2022 price increase for RTD shakes and will continue to benefit from the October 2022 price increase through the end of fiscal 'twenty three.
Shay consumption dollars grew 27% outpacing shipment growth of 19% as last year's April price increase was not fully reflected at retail until later in the third quarter.
Additionally, shipment growth was modestly impacted by the lapping of a trade inventory build in the prior year.
<unk> net sales were up 32% this quarter with volumes growing 46%.
Strong volume growth was driven by distribution gains organic growth and promotional activity.
Additionally volumes benefited from the lapping of an easier prior year comparable driven by price elasticities, and lower shipments of noncore products, resulting from supply constraints.
Price mix was a 14% headwind to <unk> growth rate in Q3, driven by higher trade promotional activity and unfavorable product mix.
Gross profit of 136 million grew 13% with a decrease in gross profit margin to 35%.
The margin decline resulted from higher input cost and trade promotion.
This was partially mitigated by pricing actions and favorable freight rates.
Gross profit in the quarter also included a $2 million unrealized mark to market adjustment on our commodity hedges, which was a 40 basis point headwind to our gross profit margin.
Excluding onetime costs in the prior year period, SG&A expenses as a percentage of net sales increased 30 basis points.
The increase was driven by 130 basis point increase in our marketing spend primarily on our powder business, partially offset by leverage on the remainder of our G&A base.
Before reviewing our outlook I would like to make a few comments on cash flow and liquidity.
I'm pleased to share that we generated $110 million in cash flow from operations in the third quarter and $141 million year to date.
As expected net working capital decreased significantly from the second quarter with reductions in both raw material and <unk> finished goods inventory.
During the.
We repaid 60 million against our revolving credit facility.
As of June 30, net debt was $893 million and net leverage was two eight times.
With our EBITDA growth and continued strong cash generation expected in Q4, we anticipate net leverage to be approximately two five times by the end of fiscal 'twenty three.
With respect to our share repurchases. This quarter, we bought one 3 million shares at an average price of $36 13 per share or <unk> $49 million in total.
Our remaining share repurchase authorization is $31 million.
Turning to our outlook, we've raised our fiscal 2023 guidance range for net sales to be $1 63 to $1 67 billion and adjusted EBITDA of $330 million to $338 million.
The updated guidance reflects our better than expected third quarter results our outlook for the fourth quarter remains largely unchanged.
In Q4, we expect premier protein net sales grow double digits with volume a larger contributor to the net sales growth rate and pricing as we restart light promotions and ship fall resets.
Similar to Q3, the reintroduction of our temporarily discontinued flavors and higher RTP production will also drive year over year volume growth.
Diamond always faces a tough comparable in Q4, as we lap the impact of high international, especially shipments in the prior year.
We expect fourth quarter, adjusted EBITDA margins to be down slightly compared to prior year as our higher SG&A as a percentage of net sales was partially offset by higher gross margins.
Gross margins are expected to benefit from lower protein cost.
Offset partially by increased promotional spend and other input cost inflation.
In closing we are pleased with our year to date performance. Our momentum continues to grow and we are well positioned to close out the year.
I'll now turn it over to the operator for questions.
Thank you.
Minor to ask a question you will need to press star one one on your telephone and if your question has been answered or you wish to remove yourself from the queue Press Star one again please.
Please standby, while we compile the Q&A roster.
And our first question comes from the line of Andrew Lazar with Barclays.
Good morning, Paul and Darcy.
Good morning, good morning.
First off as you've seen we've all seen some some center store food categories start to slow pretty meaningfully as pricing has lapped and sort of volumes have remained pressured even private label is showing lower volume at this point youre categories. Obviously have remained very resilient in the face of all of this so I was hoping to get a bit of a better sense of sort of what you.
Our consumers are telling you and if you've seen any change in behavior and I guess why do you think that the ready to drink shake and powder.
Categories, thus far at least have held up as well as they have.
Yes, I think it is.
It's the macro trends I mean, I think that.
All of the areas that are boosting so think of everything coming out of of kind of Covid. These macro trends were here before COVID-19, but they were just accelerated to think of the obesity epidemic you think of more people.
More people get after Covid, who gained weight during that period of time and who are now trying to exercise more.
Just in general the health and wellness trend. So all of those things, which were coming in just where accelerated during the COVID-19 period of time and that's what I think we're seeing I mean in general.
Volumes are solid in the category.
We're starting to see in from an RTD standpoint.
The category is being boosted by a better the capacity constraints are easing within the RTD and thats, partially because of us.
Pricing is still up but moderating.
And then from a.
Specifically on powders.
Sports Nutrition is this idea that many of the sports nutrition brands are are successfully transitioning interim into mainstream channels.
That strategy is working and it's just bringing more households into the category. So I expect this to absolutely continue these are big macro societal trends and so we expect that pricing to come down but volume to continue to be it could be at to grow steadily.
Got it thanks, and then given the very strong momentum in the business I'm curious if you've yet option for more lines to be built at your two new greenfield facilities beyond the four lines I think that each is starting with such that you're thinking about capacity for 25, and 26 not to get too far ahead of kind of ourselves.
Yes, I mean, it probably talk a little more in generalities here.
But we are absolutely. We're now planning three to five years out. So we are actively talking to our partners.
Four.
26 and <unk>.
$25 26, and 27 were what talking we are building out our long range plan and absolute we're talking about expansion.
Got it thanks, so much.
<unk>.
Thank you one moment please for our next question.
And our next question comes from the line of Ken Goldman with JP Morgan.
Hi, good morning, Thank you.
Dorothy I was curious.
Right.
Understanding that youre not ready to go into full details on 24, yet just the commentary or the reiteration of <unk>.
Sales growth to be sort of at the higher end of your algo next year.
You did talk about rebuilding some safety stock within that.
<unk>.
In the commentary really is for 20% plus capacity to be added. So I just wanted to get a sense of what that plus really is how much safety stock is going to be built and really what your actual production growth will be next year. If there's any way to kind of think about all of those given that it's a little early maybe.
Yes, I think we're giving ourselves some flexibility with the 28% plus and the main reason is because remember we just started upset opt at.
It is going well.
But.
Arent out there.
It takes somewhere between three two and three quarters to really fully ramp up and to get to the levels that we are expecting.
So there is still a ways to go and then we haven't produced a single shake at MSI. So I think that we are giving ourselves some kind of.
Latitude in that 20% plus.
I feel good about that number but I also don't feel confident enough to give any more above that number.
And then just your question about inventory build yeah, I mean, we've talked about the that kind of delta between call it 20% production and the high side of our algo.
And that difference we have to rebuild we only have about four weeks of safety stock right. Now we are at the bare minimum to operate our business right now.
Its hard on our organization.
And we basically have to be.
Really really good at forecasting specifically at the different sizes.
And at all the different facilities and it's difficult and so we.
We need to our ideal inventory.
<unk> safety stock is at eight weeks.
So we have to build anywhere between <unk> and.
Anything better than four so six to eight is really the ideal eight being perfect and so we're going to next year plan on building inventories. So we can operate effectively.
Got it thank you for that and then.
Just quickly.
Risk it again by asking you about 'twenty four but one of the questions that we've received lately is it reasonable to expect that.
All in.
Bell ring will have potentially negative pricing next year.
I think it's necessarily a bad thing right because you had non fat dry milk are down so much but.
Last I checked the street was kind of modeling flattish and you've talked about diamond ties pricing being down just curious if that's a reasonable assumption and if there's any early read on how we kind of think about that from a percentage basis.
Paul do you want answer that absolutely, yes, so from a shape perspective.
We are expecting to get to a more of a normalized promotional year. So that would obviously drive some unfavorable pricing. So we would expect some pricing headwinds on our shake business. So I think it's a fair assumption.
Short of us taking any further pricing on shakes.
Promotion would would drive that down slightly although I wish I think it's still TBD I do think that there could be some incremental promotional activity and to your point the magnitude of those.
Protein there is it is coming down faster, but I think it's a little bit of a TVD of how the market reacts.
The <unk> and the powders.
Can I just ask a quick follow up on that I know were limited to two questions, but last quarter I thought Darcy you were suggesting that <unk> was more of a pass through.
So I'm just curious why it's more of a TBD now maybe I misheard last quarter.
Yes.
Believe we said it's a pass through I think what we've said in the past is that historically what powder the powder categories. How it's acted with protein costs going up or down is it adjust promotion up or down.
The question in this particular cases the magnitude is just greater so does that still play.
When it's so I think thats the question, but it's not a pass through.
Got it great. Thank you for that.
Thank you.
One moment please for our next question.
Yes.
And our next question comes from the line of Bryan Spillane with Bank of America.
Thanks, operator, good morning, everyone.
Good morning, good morning.
I just I have.
I have a question about the the long term EBITDA margin algorithm and I guess.
Thinking a little bit about just how different maybe the business is today versus what it was when you originally set that.
Like how should we think about I guess, whether that's the right range and I guess, what I was thinking is the channel mix is changing right less club more <unk>.
Mass and food your supply chain has changed right you've got a wider network of co Mans.
Diamond ties I guess, a little bit of a bigger part of the mix and it was when you originally sent that so just if you could just kind of talk about the puts and takes there and I guess as youre looking out over Darcy. If you said youre doing kind of multiyear planning now just.
Is 18 to 20 is still the right algorithm could it maybe be different in that again, just relative to EBITDA margins. Thanks.
Sure I'll start and a nurse who feel free to jump in.
So you're correct that if you look at the last kind of our recent history, we have been on the higher side of our algorithm.
The midpoint of our guidance. This year would suggest we're at the top end of our of the long term EBITDA of 18% to 20%.
We still feel like that's the right range, we do believe that over time, we could get some additional scale benefits you mentioned some of the channel mix shifting the shift between powder in RTD it hasn't really dramatically different the margin structure. There is relatively similar.
So I do.
You have to look at this year as an example, we're not spending heavily on promotion around spending.
Spending on marketing and so those things typically will ramp up and we'll chip away at our at our margins a bit.
But yes, I agree with long term, we still feel like 18% to 20%. We've said we want to be in the top half of that and then if we see that we can continue to be at the top end of that and perhaps it should be adjusted upward a bit, but we still feel comfortable with where our algorithm today.
Yes, I would just add the channel all the things I mean, you described the changes in the business and they absolutely are true, but just to reiterate what what Paul mentioned.
From a channel mix standpoint, and a product mix standpoint, the margins are not are pretty close so that change it's more about just the scale and we absolutely do get some scale benefit but not as much as some other businesses.
With our co man model, I think where we get scale benefits are things like G&A et cetera, we do get them from kind of procurement et cetera, and we will get some from the network and so that will move but also I think we want to keep our I mean this is a branded business.
And we are bill, we're bringing in new households into the category and that takes marketing and we wanted to continue to build these brands to keep the loyalty App and we and so that's why I think again I think we're being a little bit a little conservative by keeping the algorithm where it is because remember we haven't really we haven't started.
Good marketing and promotion again on our biggest business. So we want to get kind of a year under our belt and then we'll reassess.
Okay. Thanks, and then just a quick follow up now that the supply chain is again is expanding the way it is and more diversified thirsty does it give you any more how much flexibility does it provide in terms of either product formulation changes <unk> packaging.
To the extent that you might think about different pack types for shakes.
Does this really change at all the type of flexibility you have in terms of.
Product formulations innovation and also just more flexibility on on maybe different types of packaging, if thats kind of what the market is looking for down the road.
Okay. So <unk>.
Spansion of our network, yes, we have.
We've expanded the lines of $3 30 ml. So that's the size of our main 30 Gram shake.
But we've also added a bottle come in so that absolutely does expand our ability and we can we can go we can have different sizes of bottles.
There are a ton of different packaging options within Petros.
And now we and you know me.
Many of our co Mans do have different capabilities, but our focus has been really around expanding the size now from an innovation standpoint, I see us doing more innovation of the liquid inside the same sized tetra. It's a great size of Tetra. If you look across the competitive set is.
Kind of the standard.
But I see us doing.
A fair amount of innovation around the liquid we will be looking at some packaging.
But but I think it's more likely that will be we'll be innovating more around the liquid as opposed to the packaging.
Okay. Thanks Dorothy.
Thanks.
Please for our next question.
And our next question comes from the line of Jim <unk> with Stephens.
Hi, Good morning, guys. Thanks for taking my question.
Especially I think first of all you talked about the powder buyer from your opportunity to take that brand outside of ready to drink shake and kind of expand that.
You see the powder buyer is that an existing RTD shakes buyer and they are just expanding their overall buy with the brand or are they largely incremental to the brand.
Mostly incremental to different occasion so.
The think of.
The RTD consumer the occasion is primarily a breakfast placement.
And powder is primarily used as a true protein supplement so think of it as a lot of times after working out but also as a supplement to other things, though smoothies or pink putting protein powder and pankey.
<unk> et cetera, so it's a pretty different occasions. So there is some overlap with consumers. So it would either be an incremental occasion, but more likely it actually has an incremental consumer.
Okay great.
Then on the marketing side as you guys ramp your marketing spend.
Is the primary message communicating use occasions.
Really introducing the consumer isn't aware this is a breakfast replacement, but it is not.
Can you take out the work now is that the primary messaging or is it more premier specific.
As other peers that are already in the ready to drink category.
So our whole marketing.
<unk> strategy is around and we've been using this strategy since the beginning of the brand as it started with the word of mouth is using our own loyal consumers to tell other.
Other people why they love the product so much how they use it why its different how it worked for them and it has been very successful it's very authentic.
And so theyre talking about the fantastic flavors, there talking about the incredible case theyre talking about how it changed their lives.
And yes, how they use it as well, but it's really it is about premier protein and it is not necessarily about just ready to drink shakes. This is about how premier protein is different and how it changed their lives.
Okay. Thanks, I'll hop back in the queue. Thank.
Thank you.
Thank you.
One moment please for our next question.
And our next question comes from the line of Matt Mcginley with Needham <unk> Company.
Thank you.
Our updated guidance for the year implies some healthy growth in EBITDA in the fourth quarter, but even at the high end low end and only point to about 40 basis points of margin compression compared to the 230 basis points that you had this quarter is that improvement driven more by favorable input prices or was the promo and marketing in the third quarter, just unusually high with the flavors have you launched in.
Some of that doesn't repeat in the fourth quarter.
It's primarily on the protein cost stepping down from the from the high. So Q3 was really the peak of protein cost.
To be clear on the milk proteins, and then we expect them to step down in the fourth quarter versus the third quarter.
So that is the primary driver we have a little bit less promotion in the powder business, but we also ramp up promotion a little bit on the shake business. So net net it's mostly protein.
Got it.
Supply chain expansion that is probably more of a tactical question, but will you be relaunching, our launching additional flavors with that supply chain expansion as it comes online or are you good with where you need to be with flavors right. Now on this next expansion is really more about having the capacity to grow for the next few years.
Yes, and yes.
Yeah.
Flavors.
Flavors continue to bring in excitement and new people into the brand and then you side really the big thing we.
We added this quarter was the three discontinued the temporarily discontinued flavors as well as our <unk> expansion of their float, but with that you saw.
Bump up almost one point of household pen so.
They work they.
They provide excitement people get really sick of chocolate and vanilla.
So we see a long runway for flavors.
And then but then I would say and yes, because we're also looking at.
Different formulas, so think of everything from anything to bring in either a new occasion or a new consumer.
No.
Bank of <unk>.
Different levels of protein different types of protein different.
Formulations. So all of that are we have a very active R&D team that is.
<unk> of ideas to bring in new to introduce premier protein to a broader set of consumers.
Okay, great. Thank you very much.
You all know.
I'm pleased for our next question.
Our next question comes from the line of Jason English with Goldman Sachs.
Okay.
Hey, folks thanks for slotting.
Darcy is great to hear the comments about the <unk>.
<unk> got just the product affinity.
As we look into next year and we look at what I think we all agree is a pretty.
Pretty sharp deflationary trend of input costs, I imagine you'll be throwing off a lot of excess gross profit.
What are the plans in terms of marketing because you think about building a big beverage brands.
When you think about what marketing spend which you don't have your marketing spend is actually quite low as a percentage of sales over the absolute dollar terms.
Do you see an opportunity to meaningfully ramp up as we go into next year.
And if so how would you look to bring the brand to life and win.
Hi, Bert can we expect to see maybe some campaigns coming to life to illustrate how you were evolving our brand story is not just a box for it. Thank you.
Yeah for sure. So I'll answer the marketing question, Paul if you want to add anything else about the margins.
So this brand you are right, we definitely have a lower percentage of marketing spend and I think.
Other beverage brands.
It's unique it's a brand that because of our loyalty our consumer loyalty loyalty, we are able to spend less and I'll give you and I'll explain why.
Once we put so in 'twenty one when we actually did TV. We had it we had a campaign we also have digital et cetera.
We still where we were able to put it out on the air but then our follow our social and Influencer following basically take that message and really organically get it out to all of their followers.
And it just has to do with how passionate our consumers are so I I.
I do not think we will ever need to spend at the levels of some of the big Big beverage brands now, having said that we will increase our marketing.
We haven't for the last we've never really.
Spent.
Four we will never spend really during Q1, but think of nine months. We've never we've never spent at the at the level I think that we should for nine months because when we have the.
The increase was too steep and we ran into capacity constraints that will not happen I think that we will we will and if it does I guess, that's a good problem but.
I think that as we at towards the end of 'twenty four we're going to ease into support in 'twenty. Four we will start with promotion in Q2, and then will ease in marketing towards the back half of 'twenty four.
And think of kind of the very back half into 25 is when youre going to start seeing Q4 'twenty four is when you're going to start seeing some major television campaigns digital support where youre going to see us really bring the brand to life.
Okay, and I think I would say.
You guys are all weighing on the margins as well, we aren't going to be I'm sorry, Jason.
So a couple of things to think about so you've talked about 24 margins and Theres a couple of things Youre right protein cost commodities are coming down.
But we also have other things going the other way. So we have some headwinds we do have inflation on.
On some of our other raw materials and manufacturing costs.
That's partially offsetting the protein savings and also we expect to spend more on promotion.
In 2004 so.
Pending on how we play the marketing versus promotion that will.
Then on how gross margins play versus 'twenty, three but those are the big drivers and as Darcy talked about then obviously, we expect to spend more on marketing. So net net we're calling for EBITDA margins to be at the high side of our algorithm for 'twenty.
Suggest.
The slight decline from where we are in 'twenty three.
Okay. Okay. Thank you.
Thanks, Jason Thank you.
One moment please for our next question.
And our next question comes from the line of David Palmer with Evercore ISI.
Hi, Thanks, Good morning, I, just wanted to get a sense from you.
How would you characterize the competitive environment today versus maybe pre COVID-19 and post some of the changes we've seen in your competitive set recently, even since the spring seen some shifts in some of the other player market shares below.
What youre doing and Youre, leading share which is not not.
Giving up share, but we're seeing some share shifts below you.
Are any of those challenger brands kind of making it more competitive more discount oriented any ways that you see this competitive environment being reshaped.
So I think some of the competitive dynamic.
Or that.
So I talked about obviously pricing went at it starting to moderate and I'm, assuming you're talking about specifically RTD.
Yes, exactly okay, yes so.
I'll just hit on some of the high level dynamics. So first pricing pricing is still up but moderating down.
Capacity constraints are easing so in that way there.
I think that we're starting to see so if you look at <unk> for instance.
For the last several quarters, we saw TDP is actually falling because of out of stocks because of capacity constraints and it wasn't it was it really across the board you started to see in this quarter Tdp's up. So that's a good sign that kind of in stock levels are coming up and what's nice about it it's not just it's not big.
Demand is falling it's actually because there is more supply which is nice to see.
I think that.
There <unk>.
Sports nutrition.
Really.
Growing the category are two areas, which is so if you think of the kind of four need states that we've talked about before adult nutrition.
<unk> nutrition.
Weight management, and everyday nutrition sports nutrition and everyday nutrition are really.
Boosting the category and it is led by sports nutrition that is very different from what we had seen before during COVID-19 adult nutrition was really driving what was interesting about it is and thats kind of the insurers and the boost of the world What's interesting as they were.
Growing they werent growing households, they were just growing by rate, but what we're seeing now is that's going back to kind of historical levels kind of low double low single digit growth, but what's really growing and exploding as sports nutrition and everyday nutrition and I think that goes back to some of the trends we were talking about at the very big.
Getting of the call, which is just around <unk>.
More coming out of Covid more people are trying to.
Be more active.
Get back to the gym start their workout regimen, and it's boosting some of the brands within those categories. So so I think in general the some of the challenger brands that you referenced.
Our.
Our growing for sure and we're watching but I would say that.
That it has more to do with kind of the tailwind of both the sports nutrition need state and everyday nutrition needs Street.
That's very helpful. Thanks, I'll pass it on.
Thank you.
Please for our next question.
Okay.
And our next question comes from the line of Jon Andersen with William Blair.
Hey, good morning, Thank you for the questions.
Two quick ones.
Wanted to come back to your comments around innovation.
The things we've observed is obviously in the.
Powder category.
They are based protein is a significant.
A portion of that market not so much in ready to drink shakes.
I'd Love to hear your perspective on why is this is it an issue achieving kind of the right flavor composition with the protein content.
Is this changing when you're referring to kind of innovation of the liquid.
Could you kind of consider.
In that area and do some of your co man relationships, perhaps helps support this over time.
Okay.
Yes, you are right to powders plant base is much bigger than the patterns that then in the ready to drink and it's really because of taste.
With powders you can cover up the taste.
You can put it in a smoothie and you can put a lot of fruit in it and it'll tastes like the fruit so.
That helps with ready to drink you can't hide behind anything and so it is it's difficult to make P protein tasting and that is absolutely a lot of.
A lot of companies are working on that and yes. There is expertise all over the place including co Mans, including.
Protein suppliers and obviously within the branded said we have a ton of experience here.
So I think that that will come.
And.
It's just a matter of time.
Okay. Thanks, and then with respect to your.
Our supply network and some of the additions that you mentioned earlier on the call.
As you think about your longer range plans, you referred to kind of 'twenty five 'twenty six 'twenty seven.
Particularly around those new greenfield facilities.
Are there is there capacity within those greenfield facilities for.
Substantial lagged additions in other words, if you think about kind of 25 to 27 do you see yourself growing with them.
With those providers, who have established greenfield facilities or will it require.
New additions to the co pack network. Thank you.
Yes, the partners' debt.
We expanded with.
We chose them because of their ability to scale.
And so just to give you some numbers I'll use <unk> as an example, they put in four lines. They have the ability to scale to 10.
Yeah.
And so and yeah.
And same fanapt that has the ability to scale.
Scale.
Many phases that theyre able to scale their facility so absolutely.
We have room to scale within those facilities.
And in some of other other partners as well.
They are putting in new lines.
The goal when we chose our partners was we do want.
Of fewer bigger better and.
Partners that are interested in really scaling with us and so that was one of the requirements.
Sure.
One moment please for our next question.
And our next question comes from the line of Robert Dickerson with Jefferies.
Great. Thanks, so much.
Just a quick question on the shelf resets.
You spoke to and then also you said volumes clearly would be.
Growing nicely next year, given the incremental capacity.
And the product Reintroductions I'm just curious like.
Who are the shelf resets kind of different than the incremental capacity is it incremental and then do you just kind of have line of sight with your customers that as the capacity comes online and you can reintroduce the products that have been offline that those just kind of go in on a <unk>.
Rolling basis.
Relative to having to then like wait for another reset.
Thanks.
Yes, so as we.
Or are temporarily paused flavors, the three that we brought back.
They will roll in as we have resets I think what's interesting.
Is there is a major mass customer that will be resetting in this.
In Q4.
They didn't want to wait for the reset and so they decided to put up a display.
That had our those three paused flavors for several immediately when they were available.
And till to kind of bridge the gap before the reset that is pretty unique and most don't have that flexibility and so we.
We need to wait for the resets so far we have.
Those are available and I would say.
I don't know if a third of the.
Locations and the rest of the rest of the kind of two thirds.
We'll be rolling out in the fall and the spring resets.
Got it Okay, and then just to kind of.
<unk>.
Okay.
Combine that with the commentary around kind of the timing of expected marketing spend right as you get through 'twenty four I mean, it sounds like.
As the products are introduced and they're coming online and the resets that.
Kind of maybe as we get through the first half of next fiscal year.
The primary focus is more on a little bit more kind of normal promotional activity with display youre trying to drive velocities relative to kind of pushing the consumer with respect to to two marketing expense.
Yes, Sir.
Yeah, our plan we have.
We've talked about this before and in Q4, so next quarter, we have some.
Very late promotion.
And then.
We usually.
We don't promote in Q1, but if you think of even Q2 with the big time, we will layer on.
More normal new year, New you promotion.
In store promotion.
And then layer on marketing and kind of Q3 Q4 of next year.
Don't feel like we need to.
Do it all at the same time, we always have kind of a baseline of marketing activity on all of our social channels.
And some small digital.
Some digital spend but I think what you are talking about is similar to what Jason was asking about is more of the bigger campaign and that would come later in 'twenty four.
Super.
Great. Thank you.
Thank you.
I'm pleased for our next question.
Okay.
Our next question comes from the line of John Baumgartner with Mizuho.
Okay.
Good morning, Thanks for the question.
Hi, Jonathan.
Darcy first off on the subject of household penetration for premiere you mentioned, it's the highest penetration of the category, but it's still only a fraction of the total category and when you think about where premier is not present right now how do you prioritize segmenting that opportunity do you have to hit on anything different to chip away at the next 5% to 10% of households.
And then different for the 5% to 10%, but after that Ms <unk>.
From just more marketing more flavors, I guess, what if anything needs to evolve to grow households from here.
Yeah, Great question. So first just on your first.
Comment, yes highest in the category at <unk>.
15%, but still only 15% so the overall liquid category is 43% nutrition bars, which are the part of the category that is kind of has already mainstream and that is that 55%.
And then the overall convenient nutrition category is 73% so just putting some numbers to your comment at the very beginning.
So a lot of upside.
We believe.
We believe that we can.
Double R.
Household penetration and we will do it in a few ways first of all yes, we are.
Kind of a normal playbook that we really haven't implemented yet.
No normal playbook is.
Flavors.
First it was just making sure that we have supply so.
Clearing up our out of stocks, making sure we have full full shelves than it was getting the flavors out there it's increasing.
Increasing distribution, where we already are distributed and one of those places ecommerce. We noted in our category one of the channel that is really important for discovery, meaning that people go and this is kind of obvious but especially for our category is that people go online and they.
Research this type of product before they buy and often times they will buy online first so big discovery channel, So really expanding our e-commerce presence and communication.
And we have a lot more room again, where we already are distributed specifically in food drug mass we vastly under index. We think that we should have double the space in STM venue.
And then you start getting to and then getting back to marketing and expand and getting back to a brand campaign.
Where we really can focus on those new households that are.
Look like the one that already are in our franchise, but haven't tried. So this idea of open to our Tvs, but haven't tried so we think that's a massive opportunity then we start getting to the areas that are maybe a little harder, but still very much an opportunity I think of <unk>.
<unk> expansion, we've talked about convenience foodservice.
They are great for trial, and then you bring them into our franchise and then innovation is a big part of that well. So we have a in our investor deck. We have a household penetration bridge that goes through all of those pieces to get to double the size of our household pen.
Okay. Thanks for that and then as a follow up in terms of promotion.
The distribution of this category has changed a lot since the last material wave of input cost deflation ecommerce is much larger specialty is much smaller you've got food and mass more distribution has the shift in retailers has that impacted at all sort of the net focus from the trade on discount and I'd imagine grocers or lessen clients use protein as a traffic driver.
So is it fair to think that on the downside of this commodity cycle, there's going to be less pressure to discount emanating from retailers relative to past cycles.
It's an interesting question.
We do see less.
So I guess I would answer it.
Why we okay. So I think that there will be discounting.
Based on our experience you see less gap.
In kind of more mainstream distribution. So at specialty for instance seems to go deeper.
On those promotions, so I think the overall promotional frequency.
We'll probably be around the same but I think the depth will be different will be will be lengthy.
Okay. Thanks, guys.
Thank you.
One moment please for our next question.
Okay.
And our next question comes from the line of Matt Smith with Stifel.
Yes.
Hey, good morning, guys.
Good morning.
Wanted to ask about the Incrementals.
The flavor extensions and new distribution gains in the past you've reintroduced flavors they've been very incremental.
Spurring additional consumption and I was wondering if youre still seeing that level of Incrementals I know, it's very high right now, but relative to when the flavors were reintroduced after the last supply shortage.
Given the larger size of the FTM channel compared to win.
Prior reintroduction and if theres any difference in consumer behavior, there or perhaps if the competitive set is making a difference today with with some stronger competitors accumulating some share below you in getting on their front foot in terms of capacity additions as well.
So again in my prepared remarks, I gave the incremental <unk> of root beer float.
It was 90% and so that just gives you a sense of that excitement.
Excitement the consumer excitement around flavors.
Also mentioned the retailer excitement around them.
The one.
Major mass customer that couldn't wait for the reset and they wanted to put it on display for several months. So there is definitely excitement around these new flavors.
It is very difficult to.
SaaS.
True incremental <unk> on them.
On the new on the kind of paused flavors and it's just because I mean, we're getting growth from some.
From just filling out the shelves. So it's hard to distinguish what is coming from I mean, we're putting the new flavors on the shelf and they are selling and there and we're growing and it's incremental but is that I think it takes more time, so I would love that question in a few.
Quarters, when we have more time under our belt and we have better data that I can really give you a solid incremental like.
Increment Incrementals city.
Ed.
Data point.
Okay. Thank you for that and I think Thats fair.
If I could ask a follow up on.
Your comment around innovation within the bottle and the liquid.
How do you think about the Incrementals.
<unk> for innovation, given how strong these the reintroduction of flavors is.
<unk> is performing.
As you mentioned root beer did very well.
That would seem like there is a high bar there even though.
No.
Incremental innovation beyond just flavors may ultimately unlock additional household penetration opportunity.
Yes, we are.
Cut to kind of our streams of.
Of innovation, one is just continue to expand flavors on both brands.
Continues to be and this is more it is both kind of.
L T O. So limited time offerings on on Premier, but also in line flavor expansion and <unk> also has done we didn't talk about it as much but our flavors have done very well on diamond tens as well then so that's one kind of <unk>.
Line of innovation. The other line is really focusing around.
Ah.
Incremental consumers and occasions, there are some people that arent interested in a 30 gram shake it's too much protein. There are some people that don't better lactose intolerant. There are some people that you know so there there are there is a.
Ben.
There's much more room to expand with our current lines.
But then there then we can go after a completely new consumers and that is kind of another line of innovation. So we're going after both simultaneously.
And the and really it starts with just consumer insights and focusing on.
Truly incremental to what we currently have.
Great I appreciate the color and I'll pass it on.
Thank you.
Ladies and gentlemen that concludes today's conference call. Thank you for participating and you may now disconnect.
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